Synthetic Funds Having Structured Notes

ABSTRACT

The present invention relates to synthetic funds for purchase by investors. A structured note is structured to provide customized equity returns/exposure. Terms of each structured note may be specified by the purchaser and the structured notes may be unsecured liabilities of the obligor, e.g., there are no underlying assets upon which the structure note is based. Thus, there will be no limits on the use of structured note proceeds and management of assets and liabilities will be left entirely to the obligor&#39;s discretion. Structured note payment obligations may be related to the performance of an objective valuation, but structured note holders will depend on the good credit of the obligor for payment.

PRIORITY

The present application claims priority to Provisional Application Ser.No. 60/400,042, filed on Aug. 2, 2002.

FIELD OF THE INVENTION

The present invention relates generally to investing, and moreparticularly, to a structured investment vehicle that provides superiorreturns while reducing costs to investors.

BACKGROUND OF THE INVENTION

Mutual funds were developed to give less affluent people the benefits ofdiversification and access to the expertise of sophisticated assetmanagers. Index funds emerged with the promise of much reducedtransactions costs, and improved tax efficiency. The tax efficiencyarises from the fact that index funds trade infrequently, givingindividual investors the power to decide when to take gains and losses.Notwithstanding substantial academic evidence that index fund returnsexceed the long-term performance of the vast majority of managed funds,a very large percentage of retail equity assets are still invested inmanaged funds.

Virtually all retail equity investments are based directly or indirectlyon specific portfolios of stock. Consumers own stocks directly, andmutual funds invariably pass-through (after deduction of fees)investment returns of stocks bought for the fund. This pass-throughstructure is very capital efficient for asset managers. Mutual fundinvestors buy shares in specific assets that are protected bytrustees/custodians. So long as the manager does not abuse his or herfiduciary obligations, the sole claim of investors is against pledgedassets. Investors do not expect to be protected by the balance sheet offund managers. Though the mutual fund industry has produced very goodreturns for fund managers, there is reason for concern that individualinvestors have fared far less well.

One investment vehicle that has exploded in popularity during the early2000's is the so-called “hedge fund.” While the term is applied broadly,and sometimes indiscriminately, the term “hedge funds” generally refersto private investment limited partnership vehicles run by managers whoare compensated primarily based on performance, rather than based onfixed fees or a fixed percentage of the assets under their management.Often, hedge fund managers have a personal stake in the assets.Typically, the hedge fund manager is a general partner in thepartnership and, the investors are limited partners. Typically, thestrategy is set out in and governed by the partnership agreement createdfor the fund.

Unlike conventional funds (like mutual funds) which are limited to asingle asset type (e.g., equities), hedge funds may broadly utilizevarious asset types and various strategies for managing those assettypes. The asset types may include equities, bonds, currencies, preciousmetals, commodities, and so forth. The investment instruments mayinclude conventional stock purchase, options, futures, and the like. Thestrategies may include long positions, short positions, hedging,leverage, derivatives, arbitrage and the like, and combinations of theaforementioned.

The point of hedges is that the assets and the strategies are selectedby the fund manager according to any appropriate mix—a mix that willchange as economic conditions change—to achieve good absolute returns.The concept of absolute returns is key in hedge fund theory. This isbecause the goal is not to outperform any particular market or index,but the goal is to provide a good absolute return irrespective of anyparticular market or index. This makes sense because the hedge fund mayreallocate its assets, instruments, and strategies to avoid thedownturns or limitations of any particular market or index.

Generally, hedge funds will compensate their managers based on a portionof profits, such as quarterly or annually. Fees of 15% or 30% of profits(so-called “performance fee”) are not uncommon. A fee for fundmanagement expenses (so-called “management fee”) is typically charged tocover the manager's expenses, typically about 1-3% of the fundsinvested. To the extent the fund manager has a personal stake in thefunds, he is compensated in that regard as well for any growth.Therefore, the other key aspect of hedge funds that distinguishes themfrom conventional investment vehicles is the incentive-basedcompensation for the manager. This is in contrast to conventionalbrokerages which are compensated based on transaction fees unrelated toperformance. Thus, hedge funds eliminate the motivation to “churn.”

The investment strategies charted by hedge fund managers vary greatly.Although the name “hedge funds” suggests that they employ hedgingstrategies, this is not always the case. Those that employ hedging mayuse risk mitigation strategies by selecting an element of the market(e.g., it could be a sector such as telecommunications, or it could bethe entire market), and then designing their investment strategy toinvest in that element of the market while minimizing risk frominvestment cycles. For example, a hedge fund manager whose fund is basedon utility stocks may broadly purchase equities in that sector, whilealso acquiring “put” options to sell should that sector slump.

The goal of many hedge funds is to have a zero “beta” relative to thebroader equities market. In other words, the hedge fund's performance ispreferably unrelated to the market's performance, i.e., it is “marketneutral.” This can be accomplished in various fashions. One commonstrategy is so-called “pairs trading,” where the fund's manager seeks tobuy and sell equities in pairs, the buy being for a relativelyundervalued stock (relative to the rest of that sector) and the sellbeing for a relatively overvalued stock. Implementation of hedging usingsuch strategies not only favors the investors in those hedge funds, butthe overall market benefits by becoming more liquid as a result of thecapture of the spread in the market.

Another characteristic of hedge funds is that they are usually private(largely unregulated by the SEC) and, therefore, cannot advertise.Members (investors) must be accredited and the number of investorsgenerally cannot exceed ninety-nine. Generally, an accredited investormust have a net worth greater than $1 million and/or an annual incomeexceeding $200,000. These limitations limit participation in hedge fundsto a relatively small body of fairly affluent investors. As a result,the typical investors in hedge funds are accredited individuals,institutions, endowments, fund-of-funds, family offices, and pensions.

Another investment concept that has found popularity in recent years isthe so-called “fund-of-funds.” A fund-of-hedge funds may be a fund, suchas a mutual fund, that invests in hedge funds. Or a fund-of-funds may bea fund that holds several classes of assets, such as stocks and bonds.Generally, the fund-of-funds interests are issued as shares thatcorrelate to the underlying assets. Generally, a fund-of-funds is run bya manager who can be viewed as managing the managers associated with theunderlying funds.

Fund-of-funds are often implemented as a means to invest in multiplehedge funds. Because of their high minimums and other restrictions, theaverage investor cannot invest in multiple hedge funds. A fund-of-funds,however, can be set up that invests in various hedge funds withoutrequiring a substantial investment for each investor. The manager of thefund-of-funds, therefore, can diversify risk among the multiple managersof the underlying hedge funds. Generally, fund-of-funds managers selectthe funds to diversify strategy, although not always. For example, astrategy specific fund-of-funds might be a fund of market neutral fundsthat only invests in market neutral funds.

Much of the money entering the hedge fund market has been invested viaportfolios of many hedge funds selected by an experienced asset manager,i.e., the fund-of-funds instrument discussed above. These fund-of-fundsoffer investors experienced management and diversification across manydifferent hedge fund strategies. Though the fund-of-funds impose anadditional layer of expenses, market volatility can be dampedsignificantly. It is believed that institutions own 80% of fund-of-fundsassets.

For a large institution wishing to enter the fund-of-funds business,there are several options for entering the fund-of-funds market. First,the fund-of-funds capability could be built internally. For example, inthe case of a large bank, the accounting and back office functionalityis already available. Large banks have good track records in hedge fundperformance, although this performance may not be established with thirdparties. Therefore, while a bank might be able to effectively market itstrack record to “retail” (smaller investors), large institutionalinvestors are more likely to choose managers with more experience.Another potential drawback to this approach is that developing a trackrecord satisfactory to institutions can take years.

Another option to enter the fund-of-funds market would be to partnerwith a recognized fund manager. This approach may be effective forcapturing retail business. In this case, a bank may earn thedistribution premium, retain the assets, and limit its initialcosts/risks. However, this partnering approach may not be effective withinstitutional investors because they can go directly to thefund-of-funds managers. In the eyes of institutional investors, a bankmay not be adding sufficient value in this scenario to justify the addedcosts.

Yet another option would be to simply buy a fund-of-funds business.However, prices are currently very high. For example, recent prices forfund-of-funds typically amount to 10% of assets. Only exceptionalcontinued growth will justify such high prices.

Some mutual funds advertise that they focus on tax efficiency. Usually,this means that they try to reduce turnover, and invest for longer term.While generally benefiting long-term investors, this strategy does notavoid the tax pass-through risk for short-term investors. In addition,placing any constraint on trading means that the manager cannot optimizehis cash returns.

At substantial cost, Fidelity recently announced it would enable itsmutual fund shareholders greater ability to manage their taxes, bypermitting them to sell specific shares previously purchased. While ofpotential value to a minority of investors, of greater moment to mostinvestors is the unpredictable pass-through to shareholders of gains andlosses recognized by mutual funds as fund managers trade securities.

Other drawbacks may also be present.

SUMMARY OF THE INVENTION

Accordingly, one aspect of the invention is to address one or more ofthe drawbacks set forth above.

Another aspect of the present invention is to provide investmentopportunities that track conventional asset-based investments (e.g.,hedge funds, fund-of-funds, mutual funds, etc.) without requiring thesynthetic funds manager/obligor to purchase the underlying asset.

A further aspect of the invention is to provide investments, describedas structured notes (which may include saps, derivatives, contracts,trusts, and other types of investments), with features and options thatto date have typically only been available to institutional investors.

An additional aspect of the invention is to provide consumers/brokersthe ability to: structure notes in real time, with tradablepricing/values; review how the notes would have performed duringdifferent historical periods; select features and options that optimizethe investor's goals based on their risk/utility function and outlook;execute and memorialize the trade immediately without risk of rekeyingerrors or other human mistakes.

By way of an exemplary embodiment of the invention, a process forcreating and issuing a synthetic fund with an unsecured structured notecomprises receiving a request to purchase at least one structured note,where the request comprises an amount of the at least one structurednote and at least one term of the at least one structured note,generating the at least one structured note based on the request,receiving payment for the at least one structured note, and issuing theat least one structured note, where the at least one structured note isan unsecured liability of the obligor.

By way of a further exemplary embodiment of the invention, a process forcreating and issuing a synthetic fund comprises receiving a request topurchase at least one structured note, where the request comprises anamount of the at least one structured note and at least one term of theat least one structured note, where the at least one term of the noteincludes a valuation of the at least one structured note based on atleast one objective valuation measure and a time period for redeemingthe at least one structured note, generating the at least one structurednote based on the request, receiving payment for the at least onestructured note, and issuing the at least one structured note, where theat least one structured note is an unsecured liability of the obligor.

According to another aspect of the invention, a process for creating andissuing a synthetic fund comprises receiving a request to purchase atleast one structured note, where the request comprises an amount of theat least one structured note and at least one term of the at least onestructured note, where the at least one term of the note includes: a) avaluation of the at least one structured note based on at least oneobjective valuation measure, where the valuation is based on the atleast one objective valuation measure without a predetermined amount offees associated with the objective evaluation measure and a time periodfor redeeming the at least one structured note, where the valuation ofthe at least one structured note is based in part on the time period forredeeming the at least one structured note, generating the at least onestructured note based on the request, receiving payment for the at leastone structured note, where the payment for the structured note is basedon the objective valuation measure at the time of the payment, andissuing the at least one structured note, where the at least onestructured note is an unsecured liability of the obligor.

Another exemplary aspect of the invention provides a synthetic fund forpurchase as a financial product comprising a structured note issued byan obligor, where the structured note is an unsecured liability of theobligor, and the structure note comprises at least one term, where theat least one term includes a valuation based on at least one objectivevaluation measure.

By way of a further exemplary embodiment of the invention, a syntheticfund for purchase as a financial product comprises a structured noteissued by an obligor, where the structured note is an unsecuredliability of the obligor, and the structure note comprises at least oneterm, where the at least one term includes a valuation based on at leastone objective valuation measure and a time period for redeeming the atleast one structured note, where payment for the structured note isbased on the objective valuation measure at the time of the payment.

According to an additional exemplary aspect of the present invention, Asynthetic fund for purchase as a financial product comprises astructured note issued by an obligor, where the structured note is anunsecured liability of the obligor, and the structure note comprises aplurality of terms comprising a valuation based on at least oneobjective valuation measure without a predetermined amount of feesassociated with the objective evaluation measure and a time period forredeeming the at least one structured note, where the valuation of theat least one structured note is based in part on the time period forredeeming the at least one structured note, and where payment for thestructured note is based on the objective valuation measure at the timeof the payment.

By way of a further example of the present invention, a system forissuing a structured note for a synthetic fund, the system comprises arequest module for receiving a request to purchase the structured note,a generating module for generating the structured note, a purchasemodule for receiving payment to purchase the structured note, and anissuing module for issuing the structured note in response to therequest, where the structured note is an unsecured liability of theobligor.

An additional embodiment of the invention provides a system for issuinga structured note for a synthetic fund. The system comprises a requestmodule for receiving a request to purchase the structured note, wherethe request comprises the terms of the structured note and the amount ofpurchase, and where the terms of the at least one structured notefurther comprise the valuation of the structured note and a time periodfor redeeming the at least one structured note, a generating module forgenerating the structured note, where the generating module generates aunique identifier for the structured note and where the purchaser has anidentifier, an purchase module for receiving payment to purchase thestructured note, an issuing module for issuing the structured note inresponse to the request, where the structured note is an unsecuredliability of the obligor and a storage module, where the storage modulestores and links the unique identifier for the structured note and thepurchaser identifier.

According to a further exemplary embodiment of the invention, a systemfor issuing a structured note for a synthetic fund comprises means forreceiving a request to purchase the structured note, means forgenerating the structured note, means for receiving payment to purchasethe structured note, and means for issuing the structured note inresponse to the request, where the structured note is an unsecuredliability of the obligor.

By way of a further example, a system for issuing a structured note fora synthetic fund comprises means for receiving a request to purchase thestructured note, where the request comprises the terms of the structurednote and the amount of purchase, and where the terms of the at least onestructured note further comprise the valuation of the structured noteand a time period for redeeming the at least one structured note, meansfor generating the structured note, where the generating modulegenerates a unique identifier for the structured note and where thepurchaser has an identifier, means for receiving payment to purchase thestructured note, means for issuing the structured note in response tothe request, where the structured note is an unsecured liability of theobligor and means for storing and linking the unique identifier for thestructured note and the purchaser identifier.

A further exemplary embodiment provides a computer readable medium forcausing a process to issue a structured note for a synthetic fundcomprising code for receiving a request to purchase the structured note,code for generating the structured note, code for receiving payment topurchase the structured note and code for issuing the structured note inresponse to the request, where the structured note is an unsecuredliability of the obligor.

According to a further example of the present invention, a computerreadable medium for causing a processor to issue a structured note for asynthetic fund comprises code for receiving a request to purchase thestructured note, where the request comprises the terms of the structurednote and the amount of purchase, and where the terms of the at least onestructured note further comprise the valuation of the structured noteand a time period for redeeming the at least one structured note, codefor generating the structured note, where the generating modulegenerates a unique identifier for the structured note and where thepurchaser has an identifier, code for receiving payment to purchase thestructured note, code for issuing the structured note in response to therequest, where the structured note is an unsecured liability of theobligor, and code for storing and linking the unique identifier for thestructured note and the purchaser identifier.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 illustrates the relationship between an obligor, the market andone or more customers according to an embodiment of the invention.

FIG. 2 illustrates a process for generating and issuing a structurednote according to an embodiment of the invention.

FIG. 3 illustrates a conventional funds-of-funds where the underlyingassets are hedge funds according to an embodiment of the invention.

FIG. 4 illustrates an embodiment of the synthetic fund-of-fundsaccording to an embodiment of the invention.

FIG. 5 illustrates a system for implementing a synthetic fund having oneor more structured notes according to an embodiment of the invention.

FIG. 6 illustrates a graphic user interface for manipulating termsaccording to an embodiment of the invention.

FIG. 7 illustrates a graphic user interface displaying the output ofmanipulated terms according to an embodiment of the invention.

FIG. 8 illustrates a graphic user interface displaying a report of thestatus of a structured note to the owner according to an embodiment ofthe invention.

DETAILED DESCRIPTION OF THE INVENTION

A system and process for synthetic funds is described. The system andprocess make use of existing funds to provide investment opportunitiesin structured notes. One technical effect of the invention is to providea system and process for issuing a structure note for a synthetic fundfor investment purposes. Various aspects and components of this systemand process are described below. While the present invention isdescribed in terms of structured notes issued by an obligor, it isrecognized that swaps, derivatives, contracts, trusts and other typesmay also be used, individually or in combination, as the basis forsynthetic funds.

Generally, a structured note, such as within a synthetic mutual fundstructure, may replace thinly capitalized fund managers with an issuer(also referred to as an “obligor”). According to an embodiment of theinvention, an obligor may be a credit-worthy structure note issuersupported by substantial balance sheets. Instead of buying shares in amutual fund, an investor may purchase one or more notes, structured toprovide customized equity returns/exposure (also referred to as“structured notes”). Terms of each structured note may be specified bythe purchaser. According to an embodiment of the invention, structurednotes may be unsecured liabilities of the obligor, e.g., there are nounderlying assets upon which the structure note is based. Thus, therewill be no limits on the use of structured note proceeds and managementof assets and liabilities will be left entirely to the obligor'sdiscretion. Structured note payment obligations may be related to theperformance of an objective valuation, but structured note holders willdepend on the good credit of the obligor for payment. Various featuresand aspect of structured notes will now be described in greater detailbelow. According to an embodiment of the invention, a value in sellingstructured note may occur in that the obligor receives the cash from thepurchaser. This provides the purchaser with the ability to leverage aposition, enter a short position, take certain risks, use a derivative,provide a credit risk on an institution, or other actions. Use of astructured note may avoid the use of collateral and margin calls when apurchasers position becomes strongly negative.

FIG. 1 illustrates the relationship between an obligor, the market andone or more customers (hereinafter also referred to as “purchasers,”“investors,” “consumers,” and “users”) according to an embodiment of theinvention. Obligor 100 is in communication with one or more customers110. In the relationship illustrated in FIG. 1, customers 110 areillustrated as customer A 111, customer B 112 through customer N 113,where N is a whole number. It will be recognized that various numbersand types of customers may be involved.

Market 120 comprises the entire market of objective valuation measuresand their underlying assets. By way of example, mutual funds 121, bondfunds 122 and hedge funds 123 are illustrated. However, it will beappreciated that market 120 represents the entire world of objectivevaluation measures and their underlying assets, and includes otherassets.

As illustrated in FIG. 1, investors 110 are in direct contact withobligor 100, as illustrated by lines 130. Investors 110 are further inindirect contact with market 120, illustrated by dashed lines 140.According to an embodiment of the invention, investors 110 indirectlycontact market 120 via receipt of information about the market. By wayof example, values of mutual funds, bond funds, hedge funds, individualstocks, bonds, real estate and commodities and other assets in themarket are often published in newspapers and on the internet. Further,many funds advertise their valuations in the hopes of attracting newinvestors. Thus, investors 110 may indirectly contact various aspects ofmarket 120 to determine what investments they desire.

Investors 110 may directly contact obligor 100 to purchase a structurednote based on one or more objective valuation measures within market120. For example, investor 111 directly contacts obligor 100 andrequests to purchase a structured note. In this example, investor 111may request that the structured note be value based on a bond fund 122objective valuation measure. In response to this request, obligor 100issues the structured note. Further, obligor may then directly contactmarket 120 to purchase the underlying assets associated with objectivevaluation measure.

According to an embodiment of the invention, an obligor may manage thestructured note liability very efficiently. On an aggregated basis,structured notes may represent a large and diversified portfolio ofexposures. The vast bulk of the exposure may be captured by genericindices. By way of example, when stock and mutual funds are used as anobjective valuation measure, structured notes may represent a large anddiversified portfolio of equity exposures. The exposure may be thencaptured by generic equity indices, e.g., the “Standard & Poor 500”®index, the “Wilshire 5000”® index, the “Russell 2000”® index, etc.Further, the risk may be hedged in a number of standard ways, usingstocks, futures or derivatives. As the dominant index risk will changeslowly and turnover will be low with index funds, transaction costs forthe obligor will be reduced.

There may be some basis risk between the aggregated structured noteexposure and any combination of objective market measures. However, theobligor generally will have periodic snapshots (e.g., quarterly,semi-annually, etc.) of the actual holdings of every objective measure.By way of example only, a mutual fund may make semi-annual or quarterlyreports publicly available of its holdings. The obligor can reduce itstracking error to an arbitrarily small number by adjusting: the bulkindex hedge; sector index hedges; individual stocks or other underlyings(securities, funds, etc.); the cash position; the weighting of smallcapitalization share holdings as compared to large capitalization shareholdings, etc.

According to an embodiment of the invention, structured note holders mayshape the risk and return of an investment (by introduction of option orother derivative characteristics) in a manner previously only availableto institutional investors. Thus, structured note purchasers can, byselecting various parameters for the structured note, individualize theinvestment in the same manner as afforded institutional investors.

Managing option exposures is a scale business, which may be made easierwhen the options are quite diverse (e.g., many different strike levelsand maturities). Obligors may very efficiently offer structured noteholders great flexibility in customizing their risk profiles. Riskmanagement of the options embedded in structured notes may besimplified. Option traders are most concerned about heavily concentratedoption exposures, which is not a concern regarding retail structurednote investors. By their nature, structured note options are likely tobe very diversified.

Structured note obligations may be crystallized by objective valuationmeasures, such as specific, publicly available market values. Carefuldefinition of those critical market values may be required in order toavoid the risk of exposing an obligor to arbitrage by third parties,while enabling investors and an obligor to know precisely the terminalvalue of their synthetic funds investment.

The business of issuing structured notes is a business that can easilybe institutionalized. Managing structured note liabilities is verystraightforward. Obligors need not pay extravagant fund manager salariesor exorbitant premiums to buy asset management firms. Further, obligorsmay become the low cost producer in asset management due to lowermarketing expense (piggy-back on mutual fund ads), cheaper issuance,lower administrative and accounting fees, smaller transaction costs,etc. An obligor's incremental regulatory overhead may also be less thanthe regulatory overhead for many mutual funds is substantial.

To be economically feasible, mass customization of structured notes mayrequire substantial automation. Fortunately, the required technology isnot difficult to implement. The obligor may make available anapplication for structuring, pricing, and comparing different structurednote to various parties, such as to customers online, and to itsbrokers. Pricing parameters may be established centrally, taking accountfor all aspects of each structured note, including, but not limited tocurrent market conditions (e.g., yield and volatility curves, andbid/asked spreads), historical information (e.g., volatility for eachfund, and covariance versus other funds), the risk in the portfolio(e.g., does the structured note increase or decrease the risk in theportfolio) and transaction costs.

Execution and documentation of structured notes may also be fullyelectronic. Further, an obligor may also provide an application forshowing bids for structured notes that are not currently redeemable.

The obligor is likely to be able to accumulate assets relativelyinexpensively. Because obligor's cost structure may be lower, obligorwill have the option to offer a higher return on structured notes thanany underlying fund. Various other financial service providers, such asMerrill Lynch and Schwab Investments, have demonstrated the value ofoffering a broad range of investment vehicles. However, in the presentinvention, obligors can offer a broader range of fund products than anyfund distributor. Obligors need not seek approval from fund managers inorder to reference one of their managed funds in a structured note.Instead of merely earning a distribution premium, obligors will earn thefull value provided to investors. Further, mass customization isdesirable in many retail settings. At a tiny incremental operating cost,obligors can instantly offer investors unprecedented and unparalleledcustomization choice.

Shares in an equity mutual fund are never fully invested in stock.Mutual funds are usually around 90% equity and 10% cash. Without otherresources to accommodate unexpected redemptions, mutual funds mustretain substantial cash reserves. In a rising market, these cashreserves constitute a drag on fund returns. Issuers of structured noteswill have many more options for dealing with redemptions. Obligors arevery unlikely to retain specific cash reserves.

FIG. 2 illustrates a process for generating and issuing a structurednote according to an embodiment of the invention. At step 205,manipulation of the terms of a request is performed. At step 210, arequest for one or more structured notes is received. At step 220, therequest is processed, and one or more structured notes are generated atstep 230. At step 240, a unique identifier for each structured note isgenerated. The identification of the requestor and the unique identifierare stored at step 250. At step 260, payment is received for thepurchase of the structured note. At step 270, the terms of thestructured note and the purchase amount are stored. An issuanceconfirmation is transmitted at step 280. At step 285, the uniqueidentifier, the purchaser name, the terms of the structured note and thepurchase amount are linked together. At step 290, the structured note isissued. At step 295, post issuance actions occur. The steps of theprocess illustrated in FIG. 2 will now be described in greater detailbelow.

At step 205, manipulation of the terms of a request is performed.According to an embodiment of the invention, a consumer may be permittedto manipulate one or more terms for a structured note prior to purchase.This manipulation of the terms allows a consumer to customize thestructured note to meet the consumers' specific investment needs. Eitheralone or with the assistance of a broker or other financial advisor, aconsumer may use a simulator to manipulate tears of a structured note todetermine changes in prices based on various terms, such as by usingdifferent combinations of funds, different time frames, different riskexposures, etc. According to an embodiment of the invention, anoptimization tool may be provided for use by the broker and/or theconsumer. By way of example, a consumer may provide various informationabout a desired structured note, such as the funds selected as thebasis, the distribution of the funds, the investment goals of theconsumer and the time period for the structured note. Other informationand selections may also be used. The optimization tool then generates aproposed structured note optimized to meet the objectives selected bythe consumer.

Another aspect of the present invention is a method to permit potentialbuyers of structured note, investment advisors and brokers to iterate ondifferent note structures to find the optimal combination of featuresfor the individual investor. Such a method would involve a network ofcomputer devices connected to a central server controlled by theobligor. Software on the access devices and the server would permitusers of the system to search among many funds to find those with thecharacteristics desired by the potential investor. The system would thenpermit the user to alter characteristics of the returns of the fund, bychanging terms of the note including: amount; term; coupon; earlyredemption options; ‘free exchange’ options; leveraging exposures;adding or subtracting exposures to other funds, stocks, indices, etc.;option characteristics, e.g. principal protection or incremental yieldfor giving up a portion of the potential upside; etc.

The system would be linked to market parameters provided by the obligor,which would permit users to see immediately the impact of each change onvarious aspects of the note. The obligor would be able to centrallyprovide the necessary inputs to price each note based on marketparameters. For example, a user may determine how much incremental yieldwould be provided if the note holder forgoes returns in excess of 10%.This would permit real-time pricing and sale of notes, without the needto involve traders or other risk managers.

The system would also permit users to test the newly structured note toreview its performance over different historical time frames, in bullmarkets and bear markets. For example, a user may determine how would anewly structured 3-year note have performed, versus a simple purchase ofthe underlying fund, during the period 1997-2000. The system wouldpermit users to compare total returns, including the impact of taxes, atthe potential investor's tax rate. The system can also generate tradablenote provisions, e.g., pricing and provisions that the obligor considersacceptable.

Further, the system would be structured to take inputs from usersregarding an individual note and immediately prepare the necessarydetailed legal documentation for the customized note. Once the investorchooses to execute the purchase of a structured note, the transactionwill automatically be included in the obligor's risk systems, recordedin the obligor's books and records; and, all necessary confirmation andother legal requirements would be executed.

According to an embodiment of the invention, a system may include adatabase with information on funds used as the objective valuationmeasure in the structured note, past performance of the funds,managements fees, advertising fees, etc. A processor accesses thedatabase and processes selections of options for terms of the structurednotes, determining historical returns and pricing.

According to an embodiment of the invention, a graphical use interfacemay be provided to enable a consumer, broker or financial advisor tomanipulate the terms of the structured note before purchase a purchasermay call up, historical data to analyze how a particular structured notewould have fared in a particular economic environment. In addition, apurchaser may call up pricing information such as, but not limited to,the volatility curve and the yield curve, distributed across allstructuring intervals. FIG. 6 illustrates a graphical user interface formanipulating terms according to an embodiment of the invention. In theexample illustrated in FIG. 6, the manipulation of the teens of thestructured note is provided in an internet environment. However, it isunderstood that the manipulation may occur in other mediums and/ornetworks as well. Graphical user interface 600 includes a standard menu605 that enables a user to navigate within the website.

Graphical user interface 600 also includes portions to selectinformation about that terms of the structured note. As illustrated inthe example of FIG. 6, these portions are in the form of pull downmenus. However, it is recognized that other manners of enabling a userto select information about the terms of the structured note may also beused. At portion 610, a user may select the category of the one or moreobjective valuation measures to be used. Categories may include thespecific bond fund, the specific mutual fund, the specific hedge fund,the specific commodity or any other objective valuation measure to beused in connection with the structured note. Portion 615 may enable auser to select the sector of the one or more objective valuationmeasures to be used. Sectors may include, but is not limited to, thearea of the market (e.g., financial services, technology, energy,telecommunications, transportation, etc.) and the goal of the fundchosen (e.g., large capitalization, small capitalization, aggressive,growth and income, etc.).

Portion 620 enables a user to select a family of funds. Many fundmanagement companies, such a mutual funds, offer a number of differentfunds to consumers. For example, Fidelity Investments provides tens offund options to consumers. Thus, using portion 620, a consumer mayselect a fund family, and then be presented with options provided bythat fund family in portion 625. This may also be used with bond funds,hedge funds, commodity funds, real estate investment trust funds, andother types of objective measures.

Portion 630 enables a consumer to determine the weighting of theselected objective valuation measures. According to an embodiment of theinvention, a consumer may create a structured note based on more thatone objective valuation measure. For example, a consumer could have 75%of the structured note based on a specific mutual fund and 25% on aspecific bond fund. Other weightings and objective measure could also beused. If a consumer elects to explore the potential for a structurednote based on more than one objective measure, an option may bepresented to permit the user to select additional objective valuationmeasures. According to an embodiment of the invention, the weighting ofthe structured note may be greater than or less than 100%, dependingupon the selections of the purchaser. By using leverage, taking a shortposition, taking a long position, etc., a purchaser can alter theinvestment and the weighting. Use of the structured note obviates theneed by obligors to make margin calls related to leveraged or shortpositions.

Portion 635 enables a user to select the time period for the structurednote. According to an embodiment of the invention, an obligor may offera structured note for a particular time period. In exchange, the obligormay offer superior returns. For example, if a consumer purchases astructured note for a specific time period, e.g., eighteen month, twoyears, five years, etc., the obligor may offer a better rate of return,e.g., a return of one percent above the selected objective valuationmeasurement.

Portion 640 enables a user to select the valuation history time frame. Auser may select any time period, e.g., one year, five years, since theinception of the fund, etc., upon which to evaluate the potential forfuture expectations. For example, if a user wants to purchase astructured note for five years, it may be desirable to base historicalreturns on the performance of the underling objective valuation measurefor the past five years.

Portion 645 displays the historical return based on the selections madeby the consumer while portion 650 displays the price of the structurednote based on the selection.

FIG. 7 illustrates a graphical user interface displaying the output ofmanipulated terms according to an embodiment of the invention. Asdescribed above, graphical user interface 700 includes a standard menu705 that enables a user to navigate within the website. In the exampleillustrated in FIG. 7, portion 710 displays that the user selected“Mutual Funds.” Portion 715 shows that the user has selected the“Aggressive Growth” sector.

Portion 720 displays that the user selected “Fund Management Company A,”while portion 725 displays that the user selected “Fund AG.” Portion 730discloses that the user desires a structured note based 100% on theselected fund. Portion 735 displays that the user selected a two yearstructured note. Further, the user selected a valuation history of fiveyears as displayed in portion 740.

Portion 745 displays the historical return based on the selections madeby the consumer while portion 750 displays the price of the structurednote based on the selection. In the example illustrated in FIG. 7, thehistorical return is calculated to be 8.75% per year while the price isthe amount to be paid by the purchaser. According to an embodiment ofthe invention, purchasing a structured note may be similar to purchasinga conventional bond, where the initial price does not change but thereturn or the structural changes based on attributes selected do change.Further, investments in a structured note may be “priced” based on acommitment by the purchaser. Thus, a purchaser may commit to a periodicinvestment (e.g., a monthly investment of $100) to purchase thestructured note. The purchaser may then be given the structured notesimmediately, with the pricing occurring based on the net present valueof the future payments. Alternatively, individual structured notes maybe purchased at the time a purchaser decides to make the investment.

At step 210, a request for one or more structured notes is received. Arequest may include one or more terms for the structured note. By way ofexample, terms may include the timing for redeeming the structured note,the amount or amounts of payments to be made, the basis for thevaluation of the structured note and the basis for the performance ofthe structured note. Other terms for a structured note may also be used.

According to an embodiment of the invention, the valuation of astructured note may be based on an objective valuation. Objectivevaluations may include, but are not limited to, a stock price, commodityprice, an economic index, a mutual fund, a stock market index, a bondfund, a bond index, an inflation index, a hedge fund, an interest rate,etc. Standard valuations, such as a mutual fund, are comprised of abundle of attributes. Because of its pass-through structure, allinvestors must be treated the same, i.e. the bundle is not optimal forany investor. A structured note permits characteristics to be unbundledand customized to fit the exact needs of each investor on the basis ofthe terms of the structured note.

The identity of the owner of the structured note may also be consideredpart of the terms of the structured note. The request for the structurenote may come directly from the owner, or may be made by a third partyon behalf of the owner. Further, the owner may be an individualinvestor, a trust for an individual, an entity, or anyone elseinterested in an investment product.

At step 220, the request is processed. Processing may include reviewingthe terms of the request and determining whether the terms areacceptable and appropriate. By way of example, processing may involvethe obligor ensuring that the objective valuation measure is appropriateand that the time period for investment is appropriate for the rate ofreturn requested. Other types of processing may also be used

At step 230, one or more structured notes are generated. At step 240, aunique identifier for the structured note is generated. According to anembodiment of the invention, each structured note has a correspondingunique identification (e.g., numeric, alpha-numeric, etc.) that isunique to that structure note. Other manners of identification may alsobe used. Thus, for each structured note, an identification is provided.According to an embodiment of the invention, a structured note may betreated in a manner similar to a conventional mutual fund, where theunique identifier acts as an account number. Periodic updates, e.g.,monthly, of the valuation of the structured note may be sent to theowner. Further, for marketing purposes, it may be desirable to includethe actual return of the objective valuation measure and a contrast withthe return of the structured note. Other information may also beincluded with a periodic update.

The identification of the owner of the structured note and the uniqueidentifier are stored at step 250. According to an embodiment of theinvention, the identification of the owner and the unique identifier maybe stored within a database on a data storage module. The identificationof the owner and the unique identifier may also be associated within thedatabase. Thus, the database may be accessed to retrieve variousinformation about the structured note, including the owner, thepurchaser, the terms of the structured note, and the valuation of thestructured note.

At step 260, payment is received for the purchase of the structurednote. Payment may be received by any manner, such as by receipt of cash,check, or wire transfer. According to an embodiment of the invention,the amount of payment for the purchase is based on the objectivevaluation measure at the time of purchase. By way of example only, ifone of the terms of the structured note is that the objective valuationmeasure is based on a particular publicly traded bond mutual fund, thenthe purchase is based on the valuation of that particular bond mutualfund on the day of the purchase of the structured note.

At step 270, the terms of the structured note and the purchase amountare stored. According to an embodiment of the invention, the terms ofthe structured note and the purchase amount may be stored within adatabase on a data storage module. The identification of the owner andthe unique identifier may also be associated within the database. Thus,the database may be accessed to retrieve various information about thestructured note, including the owner, the purchaser, the terms of thestructured note, and the valuation of the structured note.

At step 280, an issuance confirmation occurs. According to an embodimentof the invention, issuance confirmation may include ensuring that abroker and/or purchaser receive a notification of the purchase of theinvestment. The notification may include a document having informationabout the structured note purchase, the purchase amount, the name of thepurchase and the like. The document may be transmitted via mail, email,fax, or other manner of transmission. Upon receipt of the issuanceconfirmation, the purchaser and/or the broker may be required to approvethe purchase. According to an embodiment of the invention, the brokerand/or purchaser may be given a certain period of time within which toreject the transaction (e.g., twenty-four hours, within two days of thepurchase, etc.). If no rejection is received by the obligor within thespecified time period, the transaction is considered approved. When thedocument is transmitted electronically, various electronic tools, suchas electronic signatures, may be used to for transmission, rejection,and/or approval of the transaction.

At step 285, the unique identifier, the purchaser name, the terms of thestructured note and the purchase amount are linked together. Thus, thedatabase may be accessed to retrieve various information about thestructured note, including the owner, the purchaser, the terms of thestructured note, and the valuation of the structured note at any time.Other associations may also be used to enable appropriate information tobe retrieved as needed, such as all structured notes associated with oneowner, or all the owners of a particular structured note. Otherinformation may also be obtained.

At step 290, the structured note is issued. The issuance of thestructured note may take any form, such as an account having periodicupdates, a certificate (e.g., akin to a stock certificate) or othermanner of issuing. At step 295, post issuance actions occur.

Actions that occur after the issuance of the structured note may includechanging objective valuation measurements by the investor, altering theweighting of objective valuation measurements and communicating thestatus of the structured note. The status of the structured note maycomprise the returns to date associated with the structured note, thecurrent value of the structured note, the return of the underlyingobjective valuation measure, the difference between the value and/orreturn of the structured note and the underlying objective valuationmeasure and tax benefits.

Communication of the status of the structured note to the owner may beperformed in a variety of manners. For example, the status may becommunicated via a period statement to the structured note holder viamail, e.g., monthly, quarterly, yearly, etc. The status may also becommunicated electronically, such as via email, or via an owneraccessing an internet site. FIG. 8 illustrates a graphical userinterface displaying a report of the status of a structured note to theowner according to an embodiment of the invention. Graphical userinterface 800 includes a standard menu 805 that enables a user tonavigate within the website.

Portion 810 represents the return of the structured note for the owner.For purposes of comparison, graphical user interface 800 furtherprovides the actual return of the underlying objective valuationmeasurement in portion 815, the benefit to the structured note holder inportion 820, and the tax benefit to the structured note holder inportion 825. In the example illustrated in FIG. 8, portion 830 displaysthe information from the past quarter, portion 835 displays theinformation from the past year, and portion 840 displays the informationfrom the date of the purchase of the structured note. Additionalinformation may also be displayed, such as forecasts for the structurednote based on historic or estimated future returns over a given timeperiod.

Further, in the example illustrated in FIG. 8, a user may select theappropriate tax bracket for that user. Thus, the tax benefit of portion825 may be altered based on the selection in portion 845. According toan embodiment of the invention, portion 845 may provide a drop down menuhaving a list from which a user can select the appropriate tax bracket.Other manners for selecting the tax burden, such as selecting eitherlong term or short term capital gains, may also be used.

In addition, comparisons between the return of the structured note andthe return of the underlying objective valuation measurement and the taxbenefits may be provided in a number of manners. An owner may select tohave the comparison made in percentage terms or absolute dollar terms.

FIG. 3 illustrates a conventional funds-of-funds where the underlyingassets are hedge funds according to an embodiment of the invention. InFIG. 3, a plurality of investors 300 are permitted to invest in thefund-of-hedge funds 350. Fund-of-funds 350 is managed by a fund managerwho manages the plurality of hedge funds 375. A first level of fees arecharged by the funds managers managing the individual funds 375. Asecond level of fees are charged by the funds manager managing thefund-of-funds 350. Thus, it can readily be appreciated that there aretwo levels of fees (performance fees and/or management fees) that areimposed in such a conventional fund-of-funds structure.

An alternative, and improved, way to enter the fund-of-funds market isto create a synthetic fund-of-funds according to the present invention.According to an embodiment of the invention, an investment vehiclesuperior to any institutional fund-of-funds offering on the market is tooffer a structured note linked to a specific fund of funds but with ahigher return that synthetically will provide a higher total return as acustomized fund-of-hedge-funds. Customers then may be able to combineexisting hedge funds and/or fund-of-funds to suit their particularneeds. A customer may customize a fund of funds by adding or deletingunderlying funds. By way of example, a fund of fund contains underlyingfunds 1 through 10. A customer may examine various permutations ofstructured notes, such as a structured note with only underlying funds1-5 and 7-10, or a structured note with underlying funds 2-10. Otherpermutations may also be explored before the customer purchases thestructured note.

Structured notes are hybrid securities, having features that mayinclude: equity, commodities, straight debt instruments, etc., as wellas derivative instruments. Interest payments on structured notes can bepaid according to returns of various indexes or rates, in this case theperformance of the underlying hedge funds in the fund-of-fundscomposition selected by the investor. In addition to interest paid onthe structured note, the redemption value and final maturity of the notecan be affected by the derivatives embedded in the structured note (hereagain the underlying hedge funds).

FIG. 4 illustrates an embodiment of the synthetic fund-of-fundsaccording to an embodiment of the invention. Rather than investingdirectly into a fund-of-funds managed by a fund-of-funds manager,investors 400 would select their own fund-of-funds composition 475. Forexample, investor A 400 may select fund-of-funds composition 475comprising hedge fund A, hedge fund C, and hedge fund X. Investor B 400might select a fund-of-funds composition 475 comprising hedge fund X,hedge fund Y, and hedge fund Z. Accordingly, the synthetic fund-of-fundsissuer would issue to investor A 400 a structured note A 450 structuredto provide the performance of investor A′s selected fund-of-funds 475composition, whereas investor B 400 is issued a structured note B 450structured to provide the performance of investor B′s selectedfund-of-funds composition 475.

While FIG. 4 illustrates the concept in terms of a fund-of-hedge funds,it should be understood that the concept of issuing structured notes assynthetic fund-of-funds could be applied based on underlying assets,long or short, leveraged or not, of nearly any form: hedge funds, mutualfunds, individual equities, bonds, commodities, multiple fund-of-funds(the structured note corresponding to a syntheticfund-of-multiple-fund-of-funds) and so forth. The issuer, or obligor,issues structured notes that function as a synthetic fund-of-fundsproviding the investor the performance corresponding to the customizedfund-of-funds without requiring corresponding purchase by the obligor ofthose identical funds.

By offering the performance of customized fund-of-funds to individualinvestors, the obligor may earn fees associated with fund-of-funds whileenjoying a reduced risk more commensurate with the broader market byvirtue of the diversity and size of the overall asset collectionmaintained by the obligor. This may be accomplished because the obligoris able to manage the assets differently from the way in which theconventional fund-of-funds manager manages its assets. According to oneembodiment of the invention, the obligor offers the performance of acustomized fund-of-funds without actually acquiring a direct interest inthose underlying funds. Therefore, the obligor does not pay the costs(e.g., performance fees and management fees) associated with the firstlayer of managers for the individual funds.

According to an embodiment of the invention, obligor may short theperformance of the customized fund-of-funds using structured notes, andseparately buy and manage assets different from the underlying assets(e.g., the customized fund-of-funds) sold. While it initially may appearcounterintuitive, this intentional asset/liability mismatch may haveseveral benefits. Accordingly, one benefit may be that the obligor wouldnot need to buy an established fund-of-funds company in order to offer afew seasoned performers. Instead, the obligor could offer its customersassets, in the form of the structured notes, matching exactly theperformance of any fund of funds for which obligor can obtain data.According to an embodiment of the invention, this is likely to be aricher choice than any other single institution can offer since anysingle institution is unlikely to be able to invest in everyfund-of-funds in existence.

Another benefit may be that obligor may offer its customers the abilityto customize their exposures in ways not available elsewhere. Obligor'scustomers could be permitted to buy the performance of a well regardedfund-of-funds, and then modify the composition by adding and subtractingindividual fund exposures, hedge funds, indices, stocks, etc. By way ofexample, an investor might select a structured note based on aparticular fund of funds, and include a short or long position inspecific hedge funds. In this way, investors can under- or over-weightindividual funds or hedge fund strategies. Similarly, with mutual funds,stock positions can be over or under weighted. Because suchcustomization does not require any actual transactions in the underlyingassets, such changes conceivably could be made dynamically through time.

A further benefit may provide that investors may have the ability notonly to customize the content of the synthetic fund, but additionally(or instead) the ability to customize the strategy employed. Forexample, the investor may favor the prospects of a particularfund-of-funds XYZ, but may be less enthusiastic for the prospects ofemploying a pairs trading strategy for the foreseeable future. Theobligor may offer the performance of the fund-of-funds XYZ as customizedto remove pairs trading.

Further, instead of simply earning a small distribution spread as areseller of funds, obligor may capture the full amount of various layersof fees (e.g., the hedge fund manager's fees, the fund-of-fund manager'sfees, etc.). Because the obligor, the issuer of the structured notesproviding investors the performance of customized fund-of-funds, is notactually acquiring interests in the underlying funds, management feesmay be avoided. This may allow the obligor to receive the various layersof fees or to discount fees for investors.

According to an embodiment of the invention, options otherwise notfeasible or not permitted in conventional investments may be supported.By way of example, an investor can structure its structured note toplace caps on losses/gains. In this manner, note holders would have theability to shape their risk profile in the way that best suits them. Forexample, an investor willing to accept a maximum return of 10% over theterm of the structured note, would be entitled to an incremental return.An investor with a specific liquidity requirement (e.g. collegetuition), might choose principal protection with the specific term andamount he needs. While the result of principal protection will be toreduce the return of the structured note, it will substantially increasethe investor's certainty.

While negotiating the structured note, investors may require an earlyredemption option, or the right periodically to reallocate theirinvestment exposures. Without regard to fund restrictions, obligors canaccommodate such investor desires. Fund management groups frequentlyallow periodic ‘free exchanges,’ shifting by investors their exposures,from one fund to another, within a single fund family at no cost, e.g.investing the proceeds of an equity growth fund into an equity incomefund. At small risk/cost, obligors will be able to offer ‘freeexchanges’ across multiple fund management groups.

Implementation of the synthetic fund using the present invention may befeasible for a larger financial institution with large balance sheetsthat may choose to own assets that are different from their liabilities,in this case the structured fund-of-funds notes it sells. Such largerinstitutions need not simply match assets and liabilities, as may berequired by smaller entities such as fund-of-funds groups or mutual fundmanagement companies. Therefore, the structured notes need not match orcorrespond to the assets.

The issue of the risk to the issuer of having mismatched assets andliabilities may be dealt with across the aggregate valuation of thestructured notes issued by the obligor. With enough investors, and verylightweight controls, the overall returns of the structured notes shouldclosely track the general market for fund-of-funds. The S&P is in theprocess of establishing a hedge fund index, using 40 funds as a proxyfor the 6,000 funds currently in the market. The New York Times wrote“Standard & Poor's says its statistical research shows that 30 to 40funds reliably reporting their performance data can accurately representa much larger universe.” Therefore, whether the right number is 40 or200, the obligor may assure its structured note exposure represents thegeneral fund-of-funds market, without undue concentration to particularnames that might substantially exceed average returns.

According to an embodiment of the invention, the obligor may choose toinvest structured note proceeds (e.g., the moneys paid by the investorsto acquire structured notes corresponding to their customizedfund-of-funds) in funds that mimic or simulate the exposures of thestructured notes. This strategy would be very successful if obligorasset managers continued to beat the market. If the obligor managersjust matched market performance, obligor may still earn the full fees.In addition, if the obligor is a sufficiently large company, such as alarge financial institution, the obligor may use its wholesale buyingpower to gain access to the most attractive funds and to negotiatereduced fees.

On the issue of risk, different fund strategies perform differently overtime. However, within categories of strategies (e.g., pairs trading,convertibles, risk arbitrage, etc.), performance among fund managers andfunds is generally pretty similar. A substantial amount of basis riskmay be eliminated if the obligor invests in fund strategies on paritywith the structured notes chosen by note holders. Therefore, althoughthe liabilities and assets will be mismatched, strictly speaking therespective performances should be about the same, thus minimizing riskto the obligor.

There may be another attractive aspect for the obligor in sellingfund-of-funds structured notes (e.g., synthetic hedge funds). Typically,hedge funds investors can “cash out” (liquidate their positions) within90 days, while structured notes usually have multi-year terms. Somehedge funds will make fee concessions if funds are committed for a fixedterm, e.g., 3-5 years. Therefore, the longer terms of the structurednotes may allow the obligor to reduce the costs of acquiringcorresponding assets in hedge funds.

Of course, dependable and accurate information is important to thesuccess of the synthetic fund instrument. To offer synthetic funds mayrequire detailed performance information. In some instances, suchinformation is not always readily available. As discussed previously,hedge funds are usually structured as limited partnerships and generallyare not required to publicly report their performance. Notwithstanding,there are ways by which the obligor can gain access to sufficientlyaccurate performance information in order to successfully offer thesynthetic fund-of-funds.

Offering of a synthetic fund may provide good returns to an obligor.Selling what the market wants to buy is the lowest cost means ofdistribution. Fund-of-funds and actively managed funds charge relativelyhigh fees. These fees are on top of fees paid to hedge fund managers.Therefore, offering structured notes should be lucrative.

Structured notes may also provide a wonderful opportunity to providecustomers access to a rich array of premium products, while at the sametime allowing obligors to retain much or all of the management fees.With only one level of distribution, obligors may offer the performanceof prominent fund-of-funds at discounted fees.

As general structured notes are already well understood and accepted byinvestors, such structured notes of the present invention should not beresisted by the investment community. In addition to being wellunderstood, structured notes may provide some benefits not available inthe more ordinary fund-of-funds investments. Particularly in Europe andAsia, there is a large appetite for principal protected notes that offermost of the investment characteristics of alternative investments.

Sometimes investor preference for such structured notes is related toregulatory arbitrage. Several portfolios of private equityparticipations have been sold using principal protected notes. Buyerslimited by the size of their alternative investment baskets were able toobtain an upside similar to private equity. These notes carried a termof 15-years and a AAA guarantee of the principal. Some regulatedinvestors simply booked the notes as if they were AAA debt, thoughwithout a coupon, the guarantee is worth less than half the originalinvestment.

Also, structured notes may permit additional flexibility in offeringinvestors customized risk/rewards structures. Since there is nocommodity market for such offerings, and no current price competition,this too could be an attractive business.

In principal, an obligor could offer exposures to every public mutualfund, as well as every listed security, index, commodity price, etc.Investors could combine a number of different equity exposures in asingle structured note, or have a series of structured notes. Investorsmay choose to leverage their equity exposure up to a maximum establishedby the obligor. In a single structured note, an investor could choose totake long exposures to some funds, and short the performance of otherfunds.

Some mutual funds have been launched based on a strategy of capitalpreservation. Options traders recognize this strategy as ‘deltahedging,’ an attempt to simulate a put option by constantly adjustingthe cash/equity mix. In volatile markets, this strategy can be extremelycostly. The strategy's efficacy is uncertain, and depends on marketliquidity during times when markets are inherently illiquid. During the1987 stock market collapse, ‘delta hedging’ was blamed for a substantialportion of the sell side pressure.

Capital preservation is generally not considered a great strategy formutual funds. Mutual fund managers typically do not buy optionprotection, and are not well positioned to manage short-optionspositions. There are substantial scale economies to managing optionbooks. Delta hedging requires lots of trading, and transaction costs(bid/asked spreads) for most mutual funds are high. In addition, eachinvestor has a different view of the term of investment and amount ofcapital he or she would like to preserve. Inherently, the fund managercannot optimize for each investor, nor can he make clear to investorsthe cost or efficacy of the protection on offer. By contrast, an obligorcan offer principal protection customized to the needs of eachstructured note holder, reliant only on the credit of the obligor.

Puts and calls with the same strike and teem are priced using the samevolatility assumptions. However, in some cases people's behavior,choices and judgments may be impossible to reconcile with a rationalmodel. For example, one systemic human bias is that that losses loomlarger than gains. Studies of equity risk premium have concluded thatlosses hurt roughly 2.25 times more than gains satisfy. Under suchcircumstances, one would expect retail investors would value the abilityefficiently to reduce their downside exposures.

Institutional investors frequently take advantage of risk/return shapingthat so far has been unavailable to individuals. During the bull market,many institutions bought ‘costless collars,’ that protected a portion oftheir gains, while funding the cost (long a put option) by forgoing aportion of potential additional upside (short a call option). Suchstrategies for individual stocks would be quite costly for individuals,and currently completely unavailable for mutual funds.

Tax consequences of gains recognized by mutual funds are passed throughto shareholders. Shareholders in mutual funds generally have littlenotion of their potential tax liability connected with unrealized fundgains. In addition, the timing of tax liabilities is completelyunpredictable. Fund realization of taxable gains can inflictsubstantial, uneven and inequitable penalties on different shareholders.An investor who held a fund for a short time during which the managerchose to realize large gains may still be liable for the taxconsequences.

Structured notes will be capital assets. Unlike mutual funds, there willbe no pass-through of tax liabilities. Note holders will not faceunpredictable tax consequences. However, structured note holders willincur ordinary income for structured note coupons (e.g., direct or OID),and coupon income may exceed dividend income from the underlying stockpositions.

Mutual funds offer every investor the same liquidity. Issuers ofstructured notes can offer different liquidity provisions to eachinvestor, at prices that reflect the economic value of the liquidity.Investors could select different redemptions/call/term options, e.g., afixed term note, redeemable after one year, once a week, at variousredemption discounts, callable at a premium, extension options, eitherby the obligor or the investor, etc. Obligors might be happy to offerinvestors with a three-year investment horizon higher returns thanoffered to short-term investors.

Structured note holders may also individually choose the manner by whichthey want to take their structured note returns. Some will choose tomaximize potential long-term capital gains. Others may seek periodicfixed, or variable (e.g., linked to short-term interest rates, orcapital gains) payments. The structure of structured note cash flow canbe extremely flexible.

One example of a manner in which a structured note according to thepresent invention may be implemented is set forth below in the exampleof Sample Note #1. The structured note links to the performance of theFidelity Magellan Fund, with a principal amount of $20,000. Thestructured note closes on Dec. 15, 2002, and the final note paymentoccurs on the earliest of (i) three years from the date of closing; (ii)five days following early redemption by the investor; or (iii) five daysafter the selected mutual fund ceases to be a mutual fund. Thestructured note pays two percent semi-annually, paid on a 30/360 basis.On the final structured note payment date, the obligor will pay theamount that will provide the investor a yield equal to the greater of(i) 50 basis points more than the yield of the selected mutual fund; or(ii) 105% of the yield of the selected mutual fund, which in thisexample is the Fidelity Magellan Fund (currently closed to newinvestors). Early Redemption is permitted on the first date followingreceipt by the obligor of effective written notice by the investor,after the first anniversary of the closing. The semi-annualinternal-rate-of-return, using standard methods, is calculated: (i) forthe selected mutual fund—taking account for all cash flows the investorwould have received had he or she made an investment of the principalamount in the selected mutual fund during the term of the structurednote, and received the final NAV on the final payment date; (ii) for thestructured note—taking account for all coupons received during the termof the structured note, and the amount paid on the final structured notepayment date. The final NAV is the arithmetic average of the last fourreported NAV calculations, prior to the final structured note paymentdate.

Another example of a manner in which a structured note according to thepresent invention may be implemented is set forth below in the exampleof Sample Note #2. The structured note links to the Fidelity MagellanFund, with a principal amount of $20,000 and a closing date of Dec. 15,2002. The final structured note payment date is Dec. 15, 2005. On thefinal note payment date, the obligor will pay the amount that willprovide the investor with a yield equal to the greater of: (i) 20 basispoints less than the yield of the selected mutual fund; or (ii) theprotected principal amount, where the protected principal amount is$18,000. The mutual fund is any actively managed, publicly traded,open-ended mutual fund, which in this case is the Fidelity Magellan Fund(currently closed to new investors). The yield is the semi-annualinternal-rate-of-return calculated: (i) for the selected mutualfund—taking account for all cash flows the investor would have receivedhad he made an investment of the principal amount in the selected mutualfund during the term of the structured note, and received the final NAVon the final payment date; (ii) for the structured note—taking accountfor all coupons received during the term of the structured note, and theamount paid on the final structured note payment date. The final NAV isthe arithmetic average of the last four reported NAV calculations, priorto the final structured note payment date.

One example of a manner in which a structured note according to thepresent invention may be implemented is set forth below in the exampleof Sample Note #3. The structured note links to the Fidelity MagellanFund. The principal amount is $20,000. The closing date is Dec. 15,2002, and the final note payment date is Dec. 15, 2005. On the finalstructured note payment date, the obligor will pay the amount that willprovide investor a yield equal to: (i) 40 basis points more than theyield of the selected mutual fund; but, (ii) not less than the protectedprincipal amount, where the protected principal amount is $18,000; and(iii) not more than $23,000. The semi-annual internal-rate-of-return iscalculated: (i) for the selected mutual fund—taking account for all cashflows the investor would have received had he made an investment of theprincipal amount in the selected mutual fund during the term of thestructured note, and received the final NAV on the final payment date;(ii) for the structured note—taking account for all coupons receivedduring the term of the structured note, and the amount paid on the finalstructured note payment date. The final NAV is the arithmetic average ofthe last four reported NAV calculations, prior to the final structurednote payment date.

A further example of a manner in which a structured note according tothe present invention may be implemented is set forth below in theexample of Sample Note #4. The structured note links to a selectedmutual fund portfolio. In this example, that comprises a long positionof $30,000 on the Fidelity Magellan Fund and a short position of $20,000on the Fidelity Emerging Markets Fund. The principal amount is for$20,000, with a closing date of Dec. 15, 2002, and a final structurednote payment date of the earliest of: (i) three years from the date ofclosing; (ii) five days following early redemption by the investor; or(iii) five days after any of the mutual funds in selected mutual fundportfolio ceases to be a mutual fund. On the final structured notepayment date, the obligor will pay the sum of: (i) the principal amount;(ii) 1% interest on the principal amount; plus, (iii) the final NAV ofthe selected mutual fund portfolio, less the NAV of the selected mutualfund portfolio on the closing date. Early redemption is the first datefollowing receipt by the obligor of effective written notice by theinvestor, after the first anniversary of the closing. Final NAV is thearithmetic average of the last four reported NAV calculations, prior tothe final note payment date.

FIG. 5 illustrates a system 500 according to an embodiment of thepresent invention. The system 500 comprises a plurality of computerdevices 505 (or “computers”) used by a plurality of users to connect toa network 502 through a plurality of connection providers (CPs) 510. Thenetwork 502 may be any network that permits multiple computers toconnect and interact. According to an embodiment of the invention, thenetwork 502 may be comprised of a dedicated line to connect theplurality of the users, such as the Internet, an intranet, a local areanetwork (LAN), a wide area network (WAN), a wireless network, or othertype of network. Each of the CPs 510 may be a provider that connects theusers to the network 502. For example, the CP 510 may be an Internetservice provider (ISP), a dial-up access means, such as a modem, orother manner of connecting to the network 502. In actual practice, theremay be significantly more users connected to the system 500 than shownin FIG. 5. This would mean that there would be additional users who areconnected through the same CPs 510 shown or through another CP 510.Nevertheless, for purposes of illustration, the discussion will presumefour computer devices 505 a-505 d are connected to the network 502through two CPs 510.

According to an embodiment of the invention, the computer devices 505a-505 d may each make use of any device (e.g., a computer, a wirelesstelephone, a personal digital assistant, etc.) capable of accessing thenetwork 502 through the CP 510. Alternatively, some or all of thecomputer devices 505 a-505 d may access the network 502 through a directconnection, such as a T1 line, or similar connection. FIG. 5 shows thethree computer devices 505 a-505 d, each having a connection to thenetwork 502 through the CP 510 a and the CP 510 b. The computer devices505 a-505 d may each make use of a personal computer such as a computerlocated in a user's home, or may use other devices which allow the userto access and interact with others on the network 502. A centralcontroller module 512 may also have a connection to the network 502 asdescribed above. The central controller module 512 may communicate withone or more modules, such as one or more data storage modules 514, oneor more processor modules 516, or other modules.

Each of the computer devices 505 a-505 d used may contain a processormodule 504, a display module 508, and a user interface module 506. Eachof the computer devices 505 a-505 d may have at least one user interfacemodule 506 for interacting and controlling the computer. The userinterface module 506 may be comprised of one or more of a keyboard, ajoystick, a touchpad, a mouse, a scanner or any similar device orcombination of devices. Each of the computers 505 a-505 d may alsoinclude a display module 508, such as a CRT display or other device.According to an embodiment of the invention, a developer, a user of aproduction system, and/or a change management module may use a computerdevice 505.

The central controller module 512 may maintain a connection to thenetwork 502 such as through a transmitter module 520 and a receivermodule 518. The transmitter module 520 and the receiver module 518 maybe comprised of conventional devices that enable the central controllermodule 512 to interact with the network 502. According to an embodimentof the invention, the transmitter module 520 and the receiver module 518may be integral with the central controller module 512. According toanother embodiment of the invention, the transmitter module 520 and thereceiver module 518 may be portions of one connection device. Theconnection to the network 502 by the central controller module 512 andthe computer devices 505 may be a high speed, large bandwidthconnection, such as through a T1 or a T3 line, a cable connection, atelephone line connection, a DSL connection, or another similar type ofconnection. The central controller module 512 functions to permit thecomputer devices 505 a-505 c to interact with each other in connectionwith various applications, messaging services and other services whichmay be provided through the system 500.

The central controller module 512 preferably comprises either a singleserver computer or a plurality of server computers configured to appearto the computer devices 505 a-505 d as a single resource. The centralcontroller module 512 communicates with a number of modules. Each modulewill now be described in greater detail.

A processor module 516 may be responsible for carrying out processingwithin the system 500. According to an embodiment of the invention, theprocessor module 518 may handle high-level processing, and may comprisea math co-processor or other processing devices.

Data may be stored in a data storage module 514. The data storage module514 stores a plurality of digital files. According to an embodiment ofthe invention, a plurality of data storage modules 514 may be used andlocated on one or more data storage devices, where the data storagedevices are combined or separate from the controller module 512. One ormore data storage modules 514 may also be used to archive information.

Issue module 522 may issue structured notes and/or synthetic funds.Issuing may include forwarding a certificate and/or statement related tothe structured note to the owner. A statement may be provided on aperiodic basis, e.g., monthly, quarterly, etc. Statements may beprovided electronically, such as via email or by providing a secureinternet site for an owner of the structured note to access information.Further, as statements may be provided in hard copy form, e.g., a paperprint-out of the structured note performance, issue module 522 mayinclude, or have access to, equipment necessary to print out astatement.

While the system 500 of FIG. 5 discloses the requester device 505connected to the network 502, it should be understood that a personaldigital assistant (“PDA”), a mobile telephone, a television, or anotherdevice that permits access to the network 502 may be used to arrive atthe system of the present invention. It is understood that, while system500 is represented in FIG. 5 as a network based system, other systemsmay also be used, with applicable modules resident therein. Othersystems may also be used.

According to an embodiment of the invention, the systems and processesdescribed in this invention may be implemented on any general purposecomputational device, either as a standalone application orapplications, or even across several general purpose computationaldevices connected over a network and as a group operating in aclient-server mode. According to another embodiment of the invention, acomputer-usable and writeable medium having a plurality of computerreadable program code stored therein may be provided for practicing theprocess of the present invention. The process and system of the presentinvention may be implemented within a variety of operating systems, suchas a Windows® operating system, various versions of a Unix-basedoperating system (e.g., a Hewlett Packard, a Red Hat, or a Linux versionof a Unix-based operating system), or various versions of anAS/400-based operating system. For example, the computer-usable andwriteable medium may be comprised of a CD ROM, a floppy disk, a harddisk, or any other computer-usable medium. One or more of the componentsof the system or systems embodying the present invention may comprisecomputer readable program code in the form of functional instructionsstored in the computer-usable medium such that when the computer-usablemedium is installed on the system or systems, those components cause thesystem to perform the functions described. The computer readable programcode for the present invention may also be bundled with other computerreadable program software. Also, only some of the components may beprovided in computer-readable code.

Additionally, various entities and combinations of entities may employ acomputer to implement the components performing the above-describedfunctions. According to an embodiment of the invention, the computer maybe a standard computer comprising an input device, an output device, aprocessor device, and a data storage device. According to otherembodiments of the invention, various components may be computers indifferent departments within the same corporation or entity. Othercomputer configurations may also be used. According to anotherembodiment of the invention, various components may be separate entitiessuch as corporations or limited liability companies. Other embodiments,in compliance with applicable laws and regulations, may also be used.

According to one exemplary embodiment of the present invention, thesystem may comprise components of a software system. The system mayoperate on a network and may be connected to other systems sharing acommon database. Other hardware arrangements may also be provided.

Currently, most individual investors execute their investmenttransactions through brokers. The fund management business providesenormous revenues for many brokerage companies. This invention willlikely be viewed as competitive with ordinary funds management, andinimical to many brokerage businesses. Brokerage firms do not, ingeneral, have substantial balance sheets, and therefore are unlikely tobe large issuers of structured notes.

Brokers not restricted by funds management conflicts, and independentinvestment advisors are potential distribution forces for syntheticfunds. However, to be successful, synthetic funds will requiredevelopment of large alternative distribution channels. The sale ofsynthetic funds will also require substantial investor education.

The development of cash management accounts caused many individuals toremove their funds from bank savings accounts and establish, for thefirst time, accounts with brokerage firms. The consequence has been anenormous growth in the non-bank, brokerage and fund management industry.Today, banks represent a very small part of the consumer investmentbusiness.

One possible educational/advertising network for synthetic funds is aconsortium of banks, or other financial institutions interested inissuing structured notes. From a distribution perspective issuers ofstructured notes, independent investment advisors, and other like mindedparties could be organized to jointly develop and leverage educationalmaterials, marketing, marketing collateral and advertising. Such groupscould establish rules and standards that would inspire investorconfidence, share the cost of advertising and promotions, share thecosts of consumer education, etc.

Other embodiments, uses and advantages of the present invention will beapparent to those skilled in the art from consideration of thespecification and practice of the invention disclosed herein. Thespecification and examples should be considered exemplary only. Theintended scope of the invention is only limited by the claims appendedhereto.

While the invention has been particularly shown and described within theframework of an invest product for consumers, it will be appreciatedthat variations and modifications can be effected by a person ofordinary skill in the art without departing from the scope of theinvention. For example, one of ordinary skill in the art will recognizethat certain investment processes and systems may be applied to otherinvestment-oriented process in which valuation is not asset based.Furthermore, one of ordinary skill in the art will recognize that suchprocesses and systems do not need to be restricted to structure notes.

1-80. (canceled)
 81. A computer-implemented method for forming astructured note, the structured note comprising a contract allowing anobligor to provide a return to an investor, the return based on at leastone selectable objective valuation measure, the method comprising:identifying an investment goal through requestor interaction with agraphical user interface; implementing an optimization tool executed bycomputer processing components for generating a proposal for meeting theinvestment goal selected by the requestor, the proposal identifyingmultiple objective valuation measures; customizing the structured note,using customization components executed by the computer processingcomponents, by combining selected identified objective valuationmeasures as selected by the requestor to meet the investment objective;issuing the structured note having the multiple objective valuationmeasures and meeting the investment objective, wherein the underlyingassets of the obligor are not identical to liabilities created by theobjective valuation measures of the issued structured note.
 82. Thesystem according to claim 81, wherein the at least one selectableobjective valuation measure references at least one of: an activelymanaged fund; a mutual fund; a hedge fund; a private equity fund; aventure capital fund; a passively managed fund; an index fund; a marketindex; a stock market index; a generic market level; and a marketinstrument.
 83. The method according to claim 81, wherein customizingcomprises providing customization capabilities allowing customization ofthe objective valuation measures without a predetermined amount of feesassociated with the customization of the objective valuation measure.84. The method according to claim 81, wherein the structured note isdefined by terms including a purchase amount and a time period forredeeming the structured note.
 85. The method according to claim 81,further comprising basing obligor payment of an obligor structured noteobligation on the selected objective valuation measures at the time ofthe payment.
 86. The method according to claim 81, further comprisingproviding an interface allowing requestors to test the structured noteto review performance over multiple historical time periods.
 87. Themethod of claim 81, further comprising allowing the requester, through agraphical user interface, to model a change in a risk profile of thestructured note resulting from increasing or decreasing exposure to theobjective valuation measures.
 88. The method of claim 81, furtherpermitting requestors to: change a risk profile of at least oneobjective valuation measure; add objective valuation measures; andcustomize liquidity access for at least one objective valuation measure.89. The method of claim 81, further comprising providing a post-issuanceaddition and subtraction option enabling the requestor to add andsubtract valuation measures after issuance of the structured note. 90.The method of claim 81, further comprising allowing requestors toimplement the customization components to change weightings of themultiple objective valuation measures post issuance.
 91. The method ofclaim 81, further comprising creating a liability and asset mismatchbetween structured note liabilities defined by the portfolio andoffsetting hedge instruments, thus incurring increased risk, therebyenabling the investment return produced to exceed potential returnachievable through direct exposure to the selected objective valuationmeasures.
 92. A computer-implemented system for forming a structurednote, the structured note comprising a contract allowing an obligor toprovide a return to an investor, the return based on at least oneselectable objective valuation measure, the system comprising: acomputer memory for storing data pertaining to the at least oneselectable objective valuation measure; and computer processingcomponents for executing software modules for performing stepsincluding: identifying an investment goal through requestor interactionwith a graphical user interface; implementing an optimization tool forgenerating a proposal for meeting the investment goal selected by therequestor, the proposal identifying structured note terms includingmultiple objective valuation measures; customizing the structured noteby combining the identified objective valuation measures as specified bythe requestor to meet the investment objective; and issuing thestructured note having the multiple objective valuation measures andmeeting the investment objective, wherein the underlying assets of theobligor are not identical to liabilities created by the objectivevaluation measures of the issued structured note.
 93. The system ofclaim 92, further comprising a request module receiving a request fromthe requestor to purchase the structured note from the obligor, thestructured note having an investment return based on terms of thestructured note including the multiple objective valuation measures. 94.The system of claim 92, further comprising graphical user interfacesproviding the requestor with customization options that customizeexposure of the structured note, the customization options comprising,(a) an initial selection capability that receives an initial selectionof the exposure to the multiple objective valuation measure from therequestor, the objective valuation measures selected from multipleobjective valuation measures including both passive and active measures,and (b) a post-issuance capability that receives an alteration of theinitial selection of the exposure from the requestor.
 95. The systemaccording to claim 92, where the selected objective valuation measuresreference at least one of: an actively managed fund; a mutual fund; ahedge fund; a private equity fund; a venture capital fund; a passivelymanaged fund; an index fund; a market index; a stock market index; ageneric market level; and a market instrument.
 96. The system accordingto claim 92, wherein customization components provide customizationcapabilities allowing customization of the selected objective valuationmeasures without a predetermined amount of fees associated with thecustomization of the objective valuation measures.
 97. The systemaccording to claim 92, where terms of the structured note furthercomprise a valuation of the structured note; and where the valuation ofthe structured note is based in part on the time period for redeemingthe structured note.
 98. The system according to claim 92, where obligorpayment of an obligor structured note obligation is based on theselected objective valuation measures at the time of the payment. 99.The system according to claim 92, wherein terms of the structured notefurther comprise a purchase amount and a time period for redeeming thestructured note.
 100. The system according to claim 92, furthercomprising an interface allowing requestors to test the structured noteto review performance over multiple historical time periods.
 101. Thesystem of claim 92, further comprising allowing the requester, through agraphical user interface allowing the requestor to model a change in arisk profile of the structured note resulting from increasing ordecreasing exposure to the objective valuation measures.
 102. The systemof claim 92, wherein the customization components further permitrequestors to: change a risk profile of at least one objective valuationmeasure; add objective valuation measures; and customize liquidityaccess for at least one objective valuation measure.
 103. The system ofclaim 92, wherein the customization components allow requestors tochange weightings of the multiple objective valuation measures postissuance.